Common Auditing Screw-ups

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We recently asked 172 partners at the Big Four firms across Europe for their honest appraisal of their clients’ biggest shortcomings. Fix these problems, auditors say, and audits will go more smoothly, relationships with auditors will improve and, possibly, fees will fall. The best comments are below. Which apply to you and your company?

Time trials

• “Setting unrealistic deadlines (e.g., setting the preliminary announcement date unrealistically early), which means that client companies do not allow themselves sufficient time to review information before it is presented to the auditors for audit.”
• “Being too optimistic about financial results and communicating these too early.”
• “Insisting on tight deadlines but being late in preparing for the audit.”
• “Not keeping to the timetable—particularly around the preparation of the glossy financial statements.”
• “Late and numerous adjustments to the preliminary announcement by non-finance individuals.”
• “Unscheduled absences of key client personnel, both in the accounting department and other functions.”

Recommended Stories:

• “Not involving the auditors upfront when planning changes to the business.”
• “Lack of internal co-ordination in the relation with the client.”
• “Assume that the auditor can work in a vacuum; the best results are achieved by working together.”
• “Not dealing with our request list.”
• “Auditors are left to pick up the pieces to make sure that deadlines are met, so the focus on process rather than the quality of service.”

Governance gaps

• “Overly complex corporate structures.”
• “Not keeping the legal structure in line with the management structure, either by flattening the legal or by seeing that the current management structure still ‘owns’ the legal.”
• “Lack of involvement of the board of directors in the communication with auditors.”
• “Lack of senior management sponsorship of the importance of audit – ‘tone from the top.'”
• “Delegating the audit relationship too far down the company.”
• “No one at the client is really responsible for an efficient annual audit.”
• “Not achieving full ‘buy-in’ from the finance function around the group to deliver the company’s side of the bargain. It takes two to tango!”

Communication breakdowns

• “Closing the accounts before discussing potentially contentious issues with their auditors.”
• “Not telling the auditors when they are encountering difficulties in delivering information to us so that we can respond accordingly.”
• “Making claims of improvements in processes or controls that turn out to be inaccurate.”

Process problems

• “Not having a functioning ‘hard close’ process with all issues identified at that time being actively addressed at year end.”
• “Rotation of scope from year to year – i.e. year 1 limited review, year 2 full scope audit, year 3 limited review, etc.”
• “Not resolving accounting issues centrally, with the primary team and then distributing the results with adequate support for conclusions reached. This leads to a number of local teams running their own crusades, delaying the process.”
• “Poor controls and/or lots of different systems lead to duplication of effort with no real upside.”
• “So much focus is only placed the consolidated group accounts that the local reporting is barely an afterthought, [despite the fact that this] is the place we usually have the most problems.”

Poor preparation

• “Lack of internal review prior to audit.”
• “Not documenting/evidencing controls in a manner that is ‘auditable.'”
• “Poor audit trails and documentation of key accounting decisions.”
• “Not enough research is done/documented around the significant judgements that have been made in the group financial statements.”
• “Improperly document the ‘thought process’ in arriving at certain estimates/judgements inherent in the preparation of the financial statements and the sensitivity to alternative options/accounting choices.”
• “Not providing us well thought-out documentation as to management’s conclusions. These don’t need to be set in stone but at least provide a basis to have quality discussions. We can’t audit by ‘interview.'”
• “Underinvestment in high-quality technical accounting expertise. The result is that issues are either not identified at all or are identified too late, and are not properly documented with high-quality technical analysis and solutions.”

Value judgements

• “[Clients] only focus on low fees and not the deliverables.”
• “Believing that an audit is a commodity.”
• “Penny-pinching on auditor logistics—eg audit space, IT links, etc.”

Lack of awareness

• “Not enough knowledge on subjects that influence their financial statements and therefore not enough discussions (internally and with the auditor) on timely basis to discuss these items.”
• “Underestimating the effect of new regulation/new IFRS.”
• “Fail to recognise the sheer scale of effort required to deal with regulation cross borders.”
• “Not stepping back to look at the reasonableness of the numbers.”